While the WGC says inflation risks are still the strongest fundamental on gold prices, central bank policy and gold purchases are a growing force on price direction.
In the World Gold Council’s just-released quarterly Investment Statistics Commentary for the third quarter, the nonprofit association of the world's leading gold mining companies clearly shifts the focus of what’s moving the yellow metal’s price more and more toward central banks.
For the WGC, the various ways central banks are employing “unconventional monetary policies” are playing a bigger and bigger role in affecting the price of gold.
First, let’s take a step back from watching the daily or weekly movements of the metal to review.
Gold prices, while fairly flat during the beginning of the third quarter, rose steadily during the last part of the quarter. That climb resulted in an 11.1 percent increase in closing price when compared to the previous quarter.
However, when you look at the average price for each quarter, the increase was only 2.6 percent quarter-over-quarter. Volatility dropped during the quarter and gold’s correlation to other assets didn’t change much compared with the previous quarter either.
From a global gold investor’s perspective, most of the big news came from central banks hinting at or announcing plans to extend or expand their “unconventional monetary policy” (which the WGC uses to mean pretty much anything other than interest-rate manipulation).
Since policy meetings weren’t scheduled until the later half of the third quarter, many investors held off making decisions until after they could read the defense, so to speak, seeing what the central banks were actually going to do. At the same time, data available on central bank purchases shows that many countries continue to add to their gold reserves.
In July and August, Korea added 16 tonnes, Russia added 18.7 tonnes and Turkey gorged on 51.3 tonnes. (September data won’t be available until next month.)
By September, the central banks of Europe, Japan and the United States had all committed to further stimulus. China started a new infrastructure-spending program to the tune of $158 billion, and India promised to lower barriers to foreign investment.
The WGC notes, “Weakening economic data had finally spurred a concerted reaction by central banks, leading to a sharp rally in asset prices as the long wait for further easing came to an end.”
While many investors are looking at these actions as a bad omen for global economics, flooding the world with excess currency, one way or another, it’s seen as good news for gold investors. Bernard Sin, head of currency and metal trading at refiner MKS in Geneva noted back in September, “Gold is given a boost on the back of anything that is a form of quantitative easing.”
Expanding on that core premise, John Reade, senior vice president at Paulson & Co., said in an article in Bloomberg on Thursday, “There is no doubt the expectation or the announcement of QE4 or QE infinitive has been positive for gold and I would expect gold will do well in this environment where central banks will continue to print and where monetary policy is still in an extraordinary condition.”
It’s an interesting shift in the conversation about gold. While much of the popular press on gold in the past few years has focused on either “end of the world”-type fatalistic buyers, or the pure inflation hedge, more of the discussion is now directly about the role of central banks, in many ways (not just inflationary).
Easing monetary policy pushes gold prices up as a response to perceptions about increased inflation risk (and thus, the declining value of a dollar). But the WGC posits that, while inflation risk is the largest motivating factor, unconventional monetary policy also has additional effects that move gold as well, and they are:
1) Currency impact
2) Support of assets prices
3) Response to low interest rates